Yahoo Finance Reinsurance Group of America, Incorporated (NYSE:RGA) Q4 2023 Earnings Call Transcript
Reinsurance Group of America, Incorporated (NYSE:RGA) Q4 2023 Earnings Call Transcript February 2, 2024
Reinsurance Group of America, Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Reinsurance Group of America Fourth Quarter 2023 Earnings Conference Call. All participants’ will be in in listen-only mode. [Operator Instructions] After today’s prepared remarks there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Todd Larson, Senior Executive Vice President and Chief Financial Officer, please.
Todd Larson: Thank you. Welcome to RGA's fourth quarter 2023 conference call. I'm joined on the call this morning with Tony Cheng, RGA's President and Chief Executive Officer; Leslie Barbi, Chief Investment Officer; and Jonathan Porter, Chief Risk Officer. A quick reminder before we get started regarding forward-looking information and non-GAAP financial measures. Some of our comments or answers to your questions may contain forward-looking statements. Actual results could differ materially from expected results. Please refer to the earnings release we issued yesterday for a list of important factors that could cause actual results to differ materially from expected results. Additionally, during the course of this call, the information we provide may include non-GAAP financial measures.
Please see our earnings release, earnings presentation and quarterly financial supplement all of which are posted on our website for a discussion of these terms and reconciliations to GAAP measures. Throughout the call, we will be referencing slides from the earnings presentation, which again is posted on our website. And now I'll turn the call over to Tony for his comments.
Tony Cheng: Good morning, everyone, and thank you for joining our call. Last night, we reported adjusted operating earnings for the fourth quarter of $4.73 per share, and for the full-year of $19.88 per share. Our adjusted operating ROE, excluding notable items, was 14.4% for the year. The quarter included favorable investment and very strong GFS results along with strong organic new business and in-force transaction volume. Our underwriting experience was in line with expectations across the enterprise. This capped off a very strong year. We are excited with the great momentum in our business with our global platform, positioning us for continued growth and success. We entered 2023 with the priorities of delivering on earnings and ROE targets, as well as accelerating our new business growth all while taking an active and balanced approach to capital management.
We have delivered on all these three priorities: Firstly, we produced record EPS and strong ROE results. Second, as measured by our internal metrics, we produced a record level of new business value, which was up significantly from 2022. You will also see on slide 17 in the earnings presentation that the value of business subject to LDTI increased by more than $3 billion in 2023, primarily attributable to new business won during the year. In addition to the volume, I am also very pleased with the breadth and quality of the new business we delivered. We had strong results across many of our businesses and geographies with a significant percentage of our new business under exclusive arrangements. These types of arrangements create greater strategic value, which gets shared between our clients and RGA.
And the third priority we delivered on was our active and balanced capital management. During the quarter, we deployed $346 million of capital into in-force transactions, bringing the year-to-date total to a record $933 million. We were active across the globe with the U.S., Asia and EMEA, all contributing to our in-force transaction success. In addition to supporting our clients through deploying capital into our business, we also returned $419 million to shareholders via dividends and buybacks during the year. Finally, we launched Ruby Re, further diversifying our sources of capital to fund our exciting future growth. Our optimism for the future is fueled by our continued success in our four areas of notable growth that we have previously communicated.
Starting with our longevity and PRT business. In the U.S. PRT market, we closed our third transaction. In a very short period of time, we have established ourselves as an active and key player in this market, and we are optimistic about our prospects going forward. In the U.K. longevity space, where RGA is a clear market leader, the team has had an outstanding year, innovating in various segments of the longevity market. Based upon the current environment for global longevity business, we expect 2024 to be another very active and productive year. In our Asia Traditional segment, we continue to see positive results, bringing product development and underwriting solutions to our clients to help fuel their growth and share in their success. In China, in the fourth quarter, we launched a simplified issue medical product with a major insurer to complement the successful critical illness product we spoke about during Investor Day.
In Hong Kong, we launched a product with a market leader to provide a more inclusive form of critical illness to individuals that could not previously gain coverage. This supports our purpose of making financial protection accessible to all whilst furthering our business strategy. In our third area of notable growth, the asset-intensive business in Asia we executed transactions that combined our strength of product development with coinsurance and continued to innovate across the region to support a very active transaction pipeline. And finally, in U.S. Traditional, we closed some nice in-force blocks in Q4 and also partnered with our clients and distribution entities to drive profitable new business growth. As announced, we also made an investment to further our capabilities to support clients in digital underwriting and fulfill their purpose of closing the protection gap in the middle market.
I would be remiss not to also mention the collective group of all our other businesses where we have incredibly talented teams and market-leading positions. For example, we were able to finalize an attractive asset intensive transaction in the U.S., due to our long-term client relationship and reputation for execution certainty. In addition, we announced yesterday an asset transaction in Belgium, and we are hopeful of seeing other transactions across Europe, similar to what we have seen in Asia and North America. As proud as I am about all these accomplishments, I am even more excited about the future, building on our strong foundation created by the talent, expertise and integrity of all our people around the world. Reflecting this positive outlook, we have updated our financial targets, as shown on slide 18.
We have provided new earnings run rates and reiterated our intermediate EPS growth targets on this higher base. In addition, we increased our expected ROE range to 12% to 14%. I am clearly confident in our ability to continue to deliver growth at attractive returns to our shareholders for many years to come. Our growth prospects are built on our core principles of strong risk management combined with our entrepreneurial spirit to create new innovative solutions and share with our partners in their success. Thank you for your interest in RGA, I will now turn it over to Todd to discuss the financial results.
Todd Larson: Thanks, Tony. Moving to the quarterly results, RGA reported pretax adjusted operating income of $386 million for the quarter and adjusted operating earnings per share of $4.73. For the full-year, we reported record adjusted operating earnings per share of $19.88. For the year, adjusted operating return on equity, excluding notable items, was 14.4% we are very pleased with the strong results, as well as very strong new business volumes and capital deployment. Investment results for the quarter remained favorable. Reported premiums were up 19.2% for the quarter. For the year, premiums totaled $15.1 billion, representing an increase of 16.3% on a constant currency basis. The increase includes $500 million in premium from a U.S. PRT transaction in the fourth quarter, PRT premiums for the full-year totaled $1.5 billion.
As Tony mentioned, we have strong momentum in new business activity and expect to continue to see attractive premium growth over time. The effective tax rate for the quarter was 18.2% on pretax adjusted operating income. Below the expected range, primarily due to the distribution of earnings across the globe and generation of certain tax credits. The effective tax rate for the full-year was 21.5% on pretax adjusted operating income. Turning to the quarterly segment results, starting on slide seven in our earnings presentation. The U.S. and Latin America Traditional segment results reflected favorable group and individual health experience and slightly unfavorable claims experience and client reporting adjustments in individual life which had a larger financial impact due to the mix of experience between capped and uncapped cohorts.
As we've previously discussed, under LDTI, experience on cap cohorts as reported in the current period. For uncapped cohorts, a portion of the underlying mortality experience is reported in the current period earnings and the remaining experience is spread into the future periods. On a year-to-date basis, the underlying experience in the Individual Life business was favorable. The U.S. asset intensive business results were strong reflecting higher investment spreads, including those on floating rate securities. And our Capital Solutions business continues to perform in line with our expectations. The Canada traditional results reflected unfavorable group claims experience and impact from a one-time item of approximately $8 million. The Financial Solutions business reflected favorable longevity experience.
In the Europe, Middle East and Africa segment, the traditional business results reflected unfavorable mortality experience, most of which was recognized in the current quarter. This was partially offset by a positive impact on new business in Continental Europe. EMEA's Financial Solutions business reflect results reflected favorable longevity and other experience, including improvements in reporting. Turning to our Asia Pacific traditional business. Results reflected favorable underlying claims experience, a small portion of which was recognized in the current period. Asia Pacific Financial Solutions business reflected favorable investment spreads and strong new business. The Corporate and Other segment reported a pretax adjusted operating loss of $23 million.
Less than the expected quarterly range, primarily due to higher investment income. Moving on to investments on slides 10 through 13. The non-spread portfolio yield for the quarter was 4.86%, reflecting higher yields. For the non-spread business, our new money rate rose to 6.65%, reflecting a higher allocation to private assets in the quarter. Credit impairments were minimal and we believe the portfolio is well positioned as we move through ongoing economic uncertainties. Related to capital management, as shown on slides 14 and 15, our capital and liquidity positions remain strong. We ended the quarter with excess capital of approximately $1 billion. In the quarter, we deployed $346 million of capital into in-force transactions bringing the year-to-date total to a record $933 million.
In the quarter, we also returned a total of $106 million of capital to shareholders through $50 million of share repurchases and $56 million in dividends. We expect to remain active in deploying capital into attractive growth opportunities in our organic flow and in-force block transactions and returning excess capital to shareholders through dividends and share repurchases. As Tony previously mentioned, during the quarter, we successfully launched Ruby Re, a Missouri domiciled third-party reinsurance company. Alternative capital has been part of RGA's capital management strategy for a long time, and Ruby Re is another source of capital to support our growth. As part of the launch, RGA executed an initial retrocession of $2.5 billion of existing liabilities.
During the year, we continued our long track record of increasing book value per share. As shown on slide 16, our book value per share, excluding AOCI, increased to $144, which represents a compounded annual growth rate of 10.4% since the beginning of 2021. A metric I want to highlight is the value of business subject to LDTI as presented on slide 17. This represents expected unrealized underwriting margins, which demonstrates the long-term value of this business. We introduced this metric back in June at our Investor Day. The unrealized underwriting margin is calculated as the expected present value our future premiums, less present value of claim benefits and treaty allowances for the part of our business with reserves subject to LDTI financial reporting.
These values are derived from the cash flows used to determine reserves, which are based on current expectations and are reviewed as part of the annual audit. During 2023, this value increased to approximately $27 billion, up $3 billion or 15% from the end of 2022. The primary driver was the strong new business written during the year. To summarize, based on our current expectations, over $27 billion of pretax unrealized underwriting margin exists for the business that is already on our books. While these margins don't consider investment income or general expenses, they are expected to significantly contribute to future earnings. I want to emphasize again the current measure only contains business subject to LDTI and excludes certain asset-intensive and short duration business.
As we've discussed, 2023 was very strong for RGA and results were ahead of the intermediate term financial targets and run rates provided at our Investor Day. The primary drivers of the outperformance were favorable impacts of higher interest rates, strong new business, and favorable experience. Considering these dynamics and the continued strength of our underlying business, we have updated our current run rates and reiterated our intermediate growth targets, as shown on slide 18. We have also increased our intermediate return on equity target range to 12% to 14%. These updated run rates now represent the base from which we expect to achieve our intermediate growth targets. We believe these updates appropriately reflect our strong momentum and earnings power as we look to the future.
We continue to see good opportunities across our geographies and business lines, and we are well positioned to execute on these opportunities and our strategic plan. We are very excited about the future and expect to deliver attractive returns to our shareholders. This concludes our prepared remarks, and we would now like to open it up for questions.
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